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Advanced Tissue Woes a Blow to Industry

October 12, 2002|DENISE GELLENE | TIMES STAFF WRITER

The business of regenerative medicine was dealt another blow this week with the collapse of Advanced Tissue Sciences Inc. of San Diego, a pioneering firm that sold a replacement skin for burn victims and diabetics.

The firm's bankruptcy filing Thursday came two weeks after rival Organogenesis Inc. of Boston sought bankruptcy protection from its creditors. Analysts said the back-to-back business failures serve as a reality check in an industry that promises to use living cells to build replacement bladders, livers and other organs.

The bioengineered-skin products, though a scientific achievement, were a hard sell in the current cost-conscious environment. An eight-week regimen of Advanced Tissue's Dermagraft replacement skin costs $4,000. Sold for the stubborn leg and foot sores of advanced diabetes, it competed against the standard treatment of antiseptics and bandages.

Company spokesman Abe Wischnia said Friday that no major health insurance company has yet agreed to pay for the product, which received Food and Drug Administration approval last October. As a result, sales of the product will fall short of its modest sales goal of $3 million to $4 million for 2002, he said.

"The products show that it is technically feasible to make organs," said Fariba Ghodsian, a biotechnology analyst with Roth Capital Partners in Los Angeles. "How the market responds depends on cost and other factors."

A sour investment environment for biotechnology companies in general also contributed to Advanced Tissue's woes. It planned to sell 10 million shares to raise additional capital, but the terms it received from underwriters were not acceptable, Wischnia said.

After the company's rival, Organogenesis, closed its doors last month, the financial markets dried up for Advanced Tissue, he said.

Other segments of the regenerative-medicine business have been affected by the cooler investment climate. Geron Corp., a Menlo Park company that works with embryonic stem cells, reduced its research operations this year to conserve cash.

Advanced Tissue, which went public in 1988, used cells from the foreskins of circumcised newborns to make its skin products. Grown on mesh frames, the skin substitute was sold in the form of thumb-sized patches and could be frozen and stored for up to six months.

By the company's estimate, the market for Dermagraft was substantial. From 750,000 to 1 million diabetics suffer from chronic leg and foot sores that, if unchecked, can lead to amputation. Among the firm's investors are the Wisconsin State Investment Board, which owns 19.7% of the company. Its marketing partner, British medical device firm Smith & Nephew, owns 7.1% of the firm.

Smith & Nephew is seeking Bankruptcy Court permission to buy Advanced Tissue's skin-replacement business for $12 million--$10 million in cash and $2 million in assumption of debt. It provided Advanced Tissue with $5 million in financing to keep the company going until the court could review its offer.

Besides Dermagraft, Advanced Tissue markets a separate skin-replacement product for patients with second-degree burns that has been sold since 1997 but is not yet successful.

The skin-replacement products were Advanced Tissue's first products but not its most ambitious attempts to use tissue-engineering technology. The company, with $20 million in backing from Medtronic Inc., another medical-device firm, was developing a "heart patch" to spur growth of new tissue and blood vessels in patients with heart disease.

Advanced Tissue was in the early phase of a collaboration with the University of Washington on engineering a replacement heart, a years-long project that would first involve working in animals.

The company's outside directors are reviewing Advanced Tissue's business and will decide whether the firm should continue or close down, Wischnia said.

Advanced Tissue lost $16.3 million for the first six months of this year on revenue of $10 million. Its shares closed Friday down 69 cents, or 90%, to 8 cents on Nasdaq.

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